For all the U-turns and leaks, the ideological heart of this Budget never changed. It was what Torsten Bell, one of its lead aluthors, previously described to me as “bread and butter social democracy”. Rachel Reeves made a conscious choice to again raise taxes and spending, accelerating the UK’s drift towards a more European-style model.
The “black hole” that shaped fiscal debate for months turned out to barely exist. While downgrading productivity growth, the OBR also forecast a tax windfall, leaving Reeves with just an extra £6bn to find. But the Chancellor chose nevertheless to raise taxes by another £26bn, taking the projected tax take to an all-time high of 38.3 per cent of GDP.
Reeves spent her bounty on two priorities: increasing welfare spending and expanding her fiscal headroom. The former saw the Chancellor fund Labour-enforced U-turns on winter fuel payments and welfare cuts and abolish the two-child benefit cap, a move that Treasury sources say will lift more children out of poverty in this parliament (450,000) than in any other. The latter saw her more than double her spare capacity from £9.9bn to £22bn.
You could call it left fiscal conservatism. While George Osborne relied on spending cuts to enforce budgetary discipline – with an 80:20 split between those and tax rises – Reeves is doing the precise opposite (her ratio is 13:87). Labour MPs relished it, including a previously dejected soft left, which was swift to claim credit. “This Budget shows what’s possible when Labour hears and heeds the voices of its mainstream,” growled Mainstream, Andy Burnham’s campaign-machine-in-waiting.
The markets – whose backing Reeves made the defining test of her credibility – were approving, though the question of whether the Chancellor will have to come back for more remains. Even headroom of £22bn, the OBR warns, “remains a small margin compared to the uncertainties around our economic forecast”.
That was one of the spectres looming over this Budget, the other was the lack of growth. Reeves’ summer reading choice was Abundance, the zeitgeisty US bestseller by Ezra Klein and Derek Thompson, but this was a Budget defined by scarcity. Just ask the 4.8 million extra people who will start paying the 40p tax rate by the end of this parliament or the unprotected departments – the Home Office, Justice, local government – facing spending cuts of £6.4bn by the end of this parliament.
Tax rises and subdued wage growth mean that living standards growth is forecast to fall from 3 per cent in 2024-25 to just 0.25 per cent (the second worst for a parliament on record). “The Treasury team said their first priority was the cost of living and then delivered a Budget that makes people poorer,” laments one Labour MP. “Make it make sense.”
Reeves’ aides are happy to embrace the growth challenge. Rather than disputing the OBR’s forecasts – as some might reasonably expect after the last 24 hours – they declare that they intend to beat them (as they have this year).
A Budget that became an exercise in pure survival is deemed inside Labour to have largely succeeded. Government sources believe, in the words of one, that Reeves and Starmer will continue to “stumble on” towards May’s elections – the greatest moment of danger. But if they are ever to thrive, rather than merely survive, they desperately need one thing: growth.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[Further reading: Did Jeremy Hunt write this Budget?]
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